Last year’s sure thing is rapidly turning into this year’s sure loser. After bringing in a torrid 29% return in 2010, the barbarous relic has only managed a flaccid 7% loss so far this year, much to the distress of hedge funds and gold bugs alike. The triple top on the charts that set up over the last three months could not be more clear. What is giving traders ulcers now is the prospect of a much more serious sell off in the yellow metal in coming weeks and months.
They are right to be worried. The shift out of hard assets and into paper ones, like stocks, has been undeniable in 2011. One of the main drivers for gold in recent years has been buying from a newly enriched middle class in emerging nations. They have been joined by their own central banks, which have been scrambling to find alternatives to the US dollar to store massive reserves generated by record trade surpluses.
It’s looking like inflation fears are going to pee on this parade. A witch’s brew of rising commodity prices, soaring real estate, and increased wage demands has sent inflation over 5% in China. Much higher figures can be found in India and Vietnam. This is prompting governments to sharply raise local interest rates, making gold a less attractive investment alternative.
That’s just for starters. The CFTC has already raised margin requirements for the entire metals complex to dampen unwarranted speculation. While JP Morgan and Goldman Sachs managed to get “grandfather†exemptions to keep the markets open (as I do), most smaller players are having to pay up, increasing the amount of capital they must commit to each trade, reducing returns. Small and medium sized hedge funds and wealthy individuals trading on margin provided much of the juice for last year’s bull market.
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